Sunday, January 9, 2011

Kjell Aleklett: Yes, we are there now, and production peaked really in 2008, and the only way to get it up to those numbers again is that the production in Iraq will start very soon because that is the last part with the big oil fields they put in production. So that's the situation now, so that means peak oil was 2008.

What do governments whose economics and citizens have become heavily dependent on imports of oil do when the flow becomes unreliable? The intense attention of the developed world to Middle Eastern political affairs has always been critically tied to oil security....

And whatever their publicized angst over Saddam Hussein’s “weapons of mass destruction,” American and British authorities were also concerned about violence in an area that harbors a resource indispensable for the functioning of the world economy.

I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil. Thus projections of world oil supply and demand that do not note the highly precarious environment of the Middle East are avoiding the eight-hundred-pound gorilla that could bring world economic growth to a halt.

Rare indeed is such frank talk from a former high ranking quasi-government official, especial one who is well known for his oblique announcements about the economy and the FED's activities.

I believe that in this particular case, however, Alan might actually be right.The US, and global, economy are precariously dependent on continued flows of petroleum from the Middle East.Moreover, to compensate for the declining production rates from other countries, petroleum production rates from the Middle East no only has be maintained—they would have to increase dramatically in order to support economic growth.

As Kjell Aleklett intimated, the story of Iraq’s oil production over the next two decades will play a significant role in determining the trajectory of the economy in world, including the USA.Not necessarily economic growth mind you, but rather, the rate of decline for two pessimistic outcomes: a sharp economic contraction, or, a more gradual economic decline.

According to the EIA’s Country Analysis Brief for Iraq, Iraq's proven oil reserves were estimated in 2001 to be 115 bbs, and, this may be a low estimate. About 70 to 80 percent of these reserves are in a cluster of super-giant fields in southeastern Iraq.

According to the EIA, Iraq’s Ministry of Oil has estimated that potential production could be as much as 13.3 mbd (~4.8 bbs/yr). This would be much greater than Russia's and Saudi Arabia’s current production rates which are both about 3.6 bbs/yr. There are some very ambitious plans afoot to expand production in Iraq:

... the Iraqi Ministry of Oil signed 12 long-term contracts between November 2008 and May 2010 with international oil companies to develop 14 oil fields. Under the first phase, companies bid to further develop 6 giant oil fields that were already producing with proven oil reserves of over 43 billion barrels. Phase two contracts were signed to develop oil fields that were already explored but not fully developed or producing commercially. Together, these contracts cover oil fields with proven reserves of over 60 billion barrels, or more than half of Iraq’s current proven oil reserves.

As a result of these contract awards, Iraq expects to boost production by 200,000 bbl/d by the end of 2010, and to increase production capacity by an additional 400,000 bbl/d by the end of 2011. When these fields are fully developed, they will increase total Iraqi production capacity to almost 12 million bbl/d, or 9.6 million bbl/d above current production levels. The contracts call for Iraq to reach this production target by 2017.

EIA Country Analysis Brief for Iraq

Here’s what the Minister of Oil, Hussain al-Shahristani, forecasted in Dec 2010:

Iraq forecast[s] a 17 percent rise in oil output next year and invited companies from South Korea and Kazakhstan to sign immediately a delayed contract for the Akkas gas field, Oil Minister Hussain al-Shahristani said.

Iraq, holder of the world’s fifth-largest oil reserves, wants foreign investors to help it boost production of crude and natural gas. Output of both has suffered from insurgent attacks and a lack of investment since Saddam Hussein’s ouster in 2003. Seeking to end the stagnation, the government has awarded 12 oil contracts and three gas licences.

“Iraq’s oil production capacity will increase to 2.75 million barrels a day early next year,” Shahristani said in an interview in Baghdad yesterday.

The country now produces about 2.35 million barrels of crude a day. Shahristani attributed the expected increase to investments by the international oil companies that have signed contracts to develop Iraqi fields.

Other Iraqi government officials and independent analysts, however, have forecast slightly lower production rates:

LONDON (Dow Jones) NOVEMBER 29, 2010 Iraq is expected to increase crude oil production to around 8 million barrels a day from the current 2.35 million barrels a day in six-to-seven years, a senior Iraqi oil official said Monday.

"I expect Iraq to be one of the world's leading crude oil producers," Thamer al-Ghadban, Prime Minister Nouri al-Maliki's top energy advisor, told an Iraqi petroleum gathering being held in London.

BAGHDAD, Dec. 9 (UPI) -- Iraq is concentrating its drive to quadruple its oil output on its six "super fields," which analysts say have the potential to produce in excess of 10.5 million barrels a day by 2017.

That's just short of the Oil Ministry's declared target of up to 12 million bpd in the next six years. There is a lot of skepticism in the global oil industry that Iraq will be able to meet such an ambitious target that would challenge Saudi Arabia's supremacy.

But in recent months, some of the foreign oil companies awarded 20-year production contracts at the Super Six -- Rumaila, West Qurna 1, West Qurna 2, Majnoon, Zubair and Halfaya -- in 2009 have generally reported production increases.

The EIA country analysis brief pointed out several constraints that could prevent the planned 4 to 6 times increase over current production rates:

1) Limited refining capacity using antiquated infrastructures which cannot even meet Iraq’s modest domestic consumption.
2) Full export capacity in Iraq’s Persian Gulf ports in the south which are close to their maximum capacity (~1.5 mbd in 2009).
3) Exports from the Iraq-Turkey pipeline in the north (0.3 mbd) being restricted by sabotage. Iraq has made an agreement with Turkey to expand with Turkey to upgrade its capacity by 1 mbd.

4) There is a need for substantial increases in natural gas and/or water injection to maintain oil reservoir pressure and boost oil production. But gas is presently being flared off, fresh water is in limited supply, and sea water would have to be pumped in via pipelines that have yet to be built.

I think that Tom Whipple's commentary in a recent issue of Peak Oil Review nicely captures the skepticism about Iraq’s production goals:

Iraq, a country consisting of a highly unstable grouping of three separate religious and ethnic groups, has been in nearly constant political and military turmoil for fifty years – which is why it has so much easy-to-exploit oil left. In March the Iraqis held inconclusive elections, took nearly nine months to reach political accommodations and only recently formed a government.

During the past two year year Baghdad held several auctions which resulted in numerous foreign oil companies being allowed into Iraq to rework existing Iraqi oil fields and exploit new ones with the goal of achieving large increases in production. While Baghdad talks of becoming the world’s largest oil producer in the next five years with 12 million b/d of production, most foreign observers say that an increase from 3 million b/d to 5 million over the next five years is more realistic.

Foreign oil companies are already at work in Iraq and production increases have already been reported. The long term outlook, however, is more uncertain. US forces are scheduled to completely withdraw from the country by the end of the year. The centuries’ old conflict among the Kurds, Sunnis, and Shiites is a long way from resolution, and the nation’s infrastructure, water supply and agricultural prospects remain in shambles. For the time being, however, the prospect for growth in Iraqi oil exports remains one of the key factors that will determine the course of world production and the timing and pace of the falling global production.

In summary, there is incredible potential but also significant barriers to Iraq's planned increase in production. It remains to be seen if foreign investors and private companies with the know-how will invest in Iraq, or, if Iraq will be just be able to keep up its present level of production. The price of oil over the next few years as well as it stability would likely strongly influence the rate of future production in Iraq.

As you will see, these uncertainties in Iraq’s near-future production potential, in turn, add uncertainties to my USA export analysis.

Iraq's present petroleum exports

According to the EIA Country Analysis Brief, nearly half of Iraq’s oil goes to refineries in Asia (China, India and South Korea), the Western Hemisphere receivrd about 30% and Europe most of the remainder.

Somewhat similar to Angola, the percentage of Iraqi’s net exports to the USA, has been in decline for the past several years:

I generated the above plot from the data reported in “Total Exports” and from the EIA's Iraq Energy Profile. The plot illustrates a several year downward trend in the percentage of exports to the USA since 2003. For example, from about 56% in 2003 to about 26% in 2009.Linear regression the data over this period gives an r2 = 0.84 and with a slope of about -4 percent per year.If this trend were to continue, then by 2016, Iraq would export no petroleum to the USA. It is highly likely that the declining percent to the USA reflects the Asian countries taking an increasing amount of Iraq's production, and, likely be pushing to take more in the future.

Once again, similar to Angola, I think that having no exports to the USA in such a short timeframe is unrealistic.On the other hand, I don’t see anything that would cause the return of the percentages of exports to the USA to the levels where it was at in the early 2000s.

As a compromise between applying this linear downward trend versus just taking a 5-year average (i.e., 37.7±4.3%, which seemed too high to reflect the present reality), for the export analysis to follow, I have assumed that the percentage of Iraq’s exports to the USA will buck the downward trend, and just stay at its 2009 percentage (26.3%) going forward.

Non-linear least squares (NLLS) analysis of total petroleum production

Although there are great expectations that Iraq will be able increase its petroleum production—this has certainly not been the past reality.

The undulations in production roughly mirror the major wars that Iraq has gone through over the past 30 years: the Iran-Iraq War (I-IW) from 1980-88, the First Gulf War (GW1) from 1990-91, and the Second Gulf War (GW2) in 2003.

With the exception of 1979, Iraq's production has never exceeded about 1 bbs/yr over this period.Compare this with the above predictions of, e.g., 8 mbd in 6 years (2016) or 10.5 mbd by 2017—both of which I have marked in Figure 1 with an "x" and "*," respectively.

Figure 1 shows the best fit of the Hubbert equation to the 2003-2009 period (solid line best fit parameters: “a” = 0.175; Qo = 3.6; Q∞ = 21.9).

Based on the result of this fit, I can speculate on where the Ministry of Oil came up with a 17 percent rise in oil output for next year—17.5%/yr has been the trend for the 2003-2009 period.The best fit Q∞ value of 21.9 bbs, does not reflect that 2001 estimate of Iraq's reserves equaling 115 bbs. However, 22 bbs might reasonably reflect production from the existing aging fields, if there was no further expansion and development.

I did another fit using the Hubbert equation to the 2003-2009 period with "a" fixed to 0.175 and Q∞ fixed to 115.The best fit result (long dashed line best fit parameter Qo=2.2) is in excellent agreement with the Iraqi analyst's estimates of 8 mbd in 6 years (2016) or 10.5 mbd by 2017.My hunch is that the analysts probably did about the same thing as I just did in order to come up with those predicted production rates of 8 mbd and 10.5 mbd.And probably a cursory look at such a plot caused the Minister of Oil to come up with that +13 mbd potential maximum in production.According to my best fit that maximum would occur in about 2025.

So, Figure 1 depicts two dramatically different predictions: one based on the past 6 years of actual production data and one based on what could be if everything works out just right.My hunch is that the reality will be somewhere in between these two scenarios, and, most likely a stable production at current levels of 1 bbs/yr.Looking back at its history for the past 30 years, Iraq would be comparatively fortunate if they could just consistently maintain 1 bbs/yr production for the next few decades.

In the export analysis to follow, I will use the NLLS analysis from all three of these scenarios to illustrate the different outcomes that could be forth coming.

The first thing to notice is that the vertical scale is an order-of-magnitude less that the production curve shown in Figure. 1.The second thing to notice is that the undulations in consumption over the past 30 years pretty well match the periods of war in Iraq that I discussed in the context of Figure 1

The red line in Figure 2 shows the best-fit of the Hubbert equation to the most recent period of recovery, from 2003 to 2009 (“a” = 0.0855; Qo = 0.33; Q∞ = 9.89).A yearly increase in consumption of 8.5%/yr is a pretty strong, but, it is starting from such a small number that it takes at least a decade before this starts to substantially cut into production.

Predicting future trends in Iraqi petroleum exports

Figure 3 shows the best fits obtained using the Hubbert equation NLLS analysis of the 2003-2009 time span of consumption data and to:

1) Hubbert equation NLLS analysis the 2003-2009 production data,

2) Assuming constant production at 1 bbs/yr, and

3) Hubbert equation NLLS analysis the 2003-2009 production data assuming continuing 17.5%/yr increases in the production rate (“a”) as a reserve (Q∞) of 115 bbs.

These predicted export curves (green lines: solid, short dashed, long dashed, respectively) are calculated based on the differences between the three production scenarios minus the consumption curve shown in the figure.Additionally, I show the “measured” export data from 2003-2009 time period (i.e., the BP statistical review reported production minus the EIA reported consumption).

For all three production scenarios, the domestic consumption rate is so small that it takes about a decade to have any substantially effects on exports.

Under scenario 1, production peaks at 0.96 bbs/yr in 2012 and then declines until by 2030 it is equal to the consumption rate and hence net exports go to zero.

Under scenario 2, domestic consumption slowly cuts into the assumed constant production rate of 1 bbs/yr so that export are down about 10% to 0.9 bbs by 2020, down 17% by 2030 (0.83 bbs/yr) and down about 21% (0.79 bbs/yr) by 2040.

Under scenario 3, the production rate increases dramatically to its peak in 2025 (5 bbs/yr) with an export rate that is nearly the same (4.9 bbs) as the production rate. Production is so large that domestic consumption doesn't affect exports much until after 2040.

Because there are three different production outcomes considered above, I have produce three versions of this plot with the addition of Iraq’s exportable petroleum to the USA, which equals the predicted total exports (the green lines corresponding to scenarios (1), (2) or (3) multiplied by a fraction corresponding to the percentage of exports from Iraq to the USA (26.3%) as discussed above.

The dark plum circles show my estimate of Iraq’s measured exports to the USA, based on the production and consumption rates, as reported in the BP statistical reviewmultiplied by the fraction correspond to the actual year-by-year percentages to the USA, shown in the earlier graph in this article (titled, “Percent of Iraqi Oil Exports to USA”).

It is apparent that the first and second scenarios do not change the overall trend in the story, of declining imports to the USA, that I have been telling and retelling for the past several articles.

Under the first scenario, in 2010 USA production plus the top nine importers are providing about 76% of the USA’s predicted consumption. By 2015 this sum is down to 64% and by 2020 down to 54%. Iraqi exports end in 2030, the USA is left with getting exports from Canada and Nigeria. Under the second scenario, the decline in imports are about the same in 2015 and 2020, but by 2030 the imports still coming from Iraq would exceed all countries, expect Canada.

The third scenario is quite a different matter. By 2015, USA production plus the top nine importers still provides 70% of the USA’s predicted consumption and by 2020, this is only down to 67%. From 2019 to 2027, Iraq would actually overtake Canada and become the number one exporter to the USA. By 2030, instead of only 48 to 52% of the prediction consumption being met in scenario 1 or 2, 65% is met in scenario 3.

If the Iraq war was largely about oil, as Alan Greenspan stated, there is at least the potential here for Iraqi petroleum to provide about 10 to 15% of the USA’s predicted consumption needs in the 2020s. However, for this to occur, Iraq’s production rate would have to undergo one of the most incredible decade-and-a-half-long sustained increases in history. Specifically, an average 17.5 %/yr increase in the production rate for 15 consecutive years would be needed to push production to about 5 bbs/yr by 2025.

Can this kind of increasing production rate be sustained year after year, plus all of the infrastructure issues resolved, in the next few years? Personally, I doubt it. I think something like scenario 2 more likely will occur, at best. In the coming years, however, an important thing to keep an eye on will be Iraq’s production rate.

Also keep in mind that even if scenario 3 works out and Iraq managed over the next 20 years to pump out substantially all of their oil, the USA is still looking a decline in exports.

Well well, rounding out the top ten exporters to the USA in 2009 is Brazil-they have a lot of oil, don’t they?